In this live Google docs discussion, authors Barry Eisler and Joe Konrath engage in a fascinating dialog about the ways in which the publishing industry is responding to the threat eBooks pose to its core business model.

One key point the two make is that publishers are presently contracting authors to eBook royalty rates equivalent to those they command for traditional books. Only the publishers don’t have to physically manufacture, warehouse, and ship eBooks — the rational behind those traditional royalty rates:

Joe: We figured out that the 25% royalty on ebooks they offer is actually 14.9% to the writer after everyone gets their cut. 14.9% on a price the publisher sets.

Barry: Gracious of you to say “we.” You’re the first one to point out that a 25% royalty on the net revenue produced by an ebook equals 17.5% of the retail price after Amazon takes its 30% cut, and 14.9% after the agent takes 15% of the 17.5%.

Joe: Yeah, that 25% figure you see in contracts is really misleading. Amazing, when you consider that there’s virtually no cost to creating ebooks–no cost for paper, no shipping charges, no warehousing. No cut for Ingram or Baker & Taylor. Yet they’re keeping 52.5% of the list price and offering only 17.5% to the author. It’s not fair and it’s not sustainable.

Barry: I think what’s happening is that publishers know paper is dying while digital is exploding, and they’re trying to use the lock they’ve always had on paper to milk more out of digital. In other words, tie an author into a deal that offers traditional paper royalties, which are shrinking, while giving the publisher a huge slice of digital royalties, which are growing. The problem, from the publisher’s perspective, is that their paper lock is broken now.

They reveal how legacy publishers are engaging in tactics to stimy the adoption of eBooks — largely to their own detriment — as they desperately try to prolong their industry’s relevance:

Joe: … If you’re selling eggs, don’t piss off your chickens.

Barry: It’s not just the chickens. It’s the people who buy the eggs, too.

Joe: The readers. And the libraries. HarperCollins just announced they are putting a limit on ebook loans in libraries. After twenty-six check-outs, the library has to buy a new copy.

Talk about biting the hand that feeds…

Barry: Yes. The problem is twofold. First, by giving authors only 17.5% of the growth end of the business while keeping 52.5% for themselves, publishers are going to lose authors. Second, by attempting to retard the growth of digital–holding back digital releases until paper is ready, charging paper prices for digital books–publishers are thwarting their customers. Take a step back and consider it, and it’s hard not to see that this strategy is badly flawed. A business grows by giving customers what they want, not by insisting that customers take what the business wants them to have. It grows by cultivating its wholesale providers, not by alienating them with precentages so unfair that it motivates them to develop their own retail channels.

You’d think book publishers would have learned a lesson or two from the music industry’s well-documented missteps in dealing with the digital threat.

Eisler brilliantly sums up the core component of the book publisher’s digital dilemma:

If you think about it, for years publishers have been steadily outsourcing their core business functions. Culling the slush pile went to agents long ago. A lot of editorial devolved to agents, too. Marketing has increasingly become the responsibility of writers, who are expected to blog and be social media demons. I think publishers felt comfortable outsourcing all these functions because they felt the lock they had on their core function–distribution–made their overall position impregnable.

The problem is, they’ve lost that lock, and they’ve already outsourced so many of their other functions that it’s getting hard for them to offer a writer a coherent value proposition. For now, they have enough cash to offer advances, which most authors will need to live for the same reason most people need a mortgage to buy a house. But even that advantage is being eroded by digital, because with digital, you publish right away and start earning right away.

The two believe that with traditional book distribution going the way of the horse and buggy, editors will eventually begin to align with literary agencies and morph into full-service literary entities that provide editing, artwork, marketing, and digital formatting for 15% of a much larger pie (having cut out legacy publishers’ 52% royalty cut).

Every writer should read this conversation in full to truly appreciate the ramifications of the ‘eBook revolution’. It will most definitely impact writers’ livelihoods for many years to come.